China and its economic successes are on everyone’s lips. Under the previous government (and under pressure from the US), Germany already designated China a ‘systemic rival,’ whatever that may mean in concrete terms. In any case, it means that Germany does not want to maintain normal friendly relations with the country. Several years have passed since a Swabian Chancellor warned of the ‘yellow peril’ in the 1960s with the words: ‘I’m just saying China, China, China.’ We could have learned that China is far less dangerous than it appears to us, who generally know little to nothing about the country’s history, language, culture and economy.

These days, however, new findings are constantly emerging that are supposed to show that China is becoming a real threat to the global economy. The Financial Times, for example, shows a graph where China has a trade surplus with Germany in capital goods for the first time since 2010. This looks very impressive – and yet it is largely normal. Brad Setser has published a major article in the Council of Foreign Relations, which essentially argues that China’s rapidly growing trade surplus is a global problem, but this is also unconvincing.

The graph in the Financial Times is particularly impressive because it shows that Germany has had a huge trade surplus with China in every year since 2010. In Germany, everyone considered this to be a normal result of German superiority. Now it is gone, and there is rumbling in the German underground that something must be amiss if the Chinese suddenly dare to try to oust us from the world markets in our areas of expertise.

I have déjà vu experiences with this because there was once a phase in Germany when people were panicked by an Asian competitor, who, however, proved to be a toothless tiger over time. In the early 1980s, the then German Minister of Economics, Otto Graf Lambsdorff, travelled to Japan and came back with the conclusion that we would have to throw all conventional ideas about economics out the window because the Japanese were about to run us over.

A Chinese threat?

Setser first refers to a graph showing that, as a percentage of Chinese GDP, the export surplus for manufactured products is significantly higher today than in recent years. There is no doubt about that, but it is nevertheless astonishing that the surplus is still considerably smaller than at the beginning of the century. Let us remember: at the beginning of the century, it was mainly Western companies that produced super-cheap goods in China and exported them all over the world. By combining German high technology with low Chinese wages, they were able to sell at incredibly low prices and also reap high profits. No one was upset about this because it was the ‘good’ Western pioneer companies in China that benefited from it.

Now that China is once again showing a rising trade surplus, it is of course (and naturally) no longer supported by as many Western companies as it was back then. And now, who would have believed it, China has been exporting even more cars than before for a few years now, and even more cars than Japan, which had previously been the world leader. But what is so special about that? A country that is much larger than Japan is overtaking its neighbour after many decades because it has managed to catch up technologically, i.e. to do exactly what any reasonable person would expect from a successful developing country. Yet the anger of those who have been overtaken is obvious. There is much to suggest that the new nationalist government in Japan is fuelling political tensions with China for reasons such as these.

At first glance, a graph in which Setser compares China’s manufacturing surpluses to global GDP is also impressive. It shows that China’s surplus in recent years has far exceeded the surpluses of Japan and Germany. At its peak (in the 1980s), Japan once achieved a surplus of one per cent of global GDP, while Germany only managed 0.5 per cent in 2009/2010, and China now achieves almost two per cent. The US has a deficit of more than one per cent. But what does that tell us? A nation whose population is almost ten times that of Japan and fifteen times that of Germany is overtaking both countries in absolute terms (in relation to global GDP). So what?

Up to this point, Setser is only dealing with trade balance data, not the current account balance, which, according to IMF data, most recently closed with a surplus of only around 2 per cent of Chinese GDP. Ultimately, however, it is always the current account balance that can indicate a real imbalance in trade, because services are not inherently worse than goods.

Setser downplays this, calling it statistical shenanigans, but without having a truly compelling argument as to why the estimates of the current account deficit should be so inaccurate. The current account deficit as a percentage of GDP is undoubtedly the only relevant indicator, and the IMF has a monopoly on calculating these figures.

The political response

In any reasonable political assessment of China’s successes, it must also be noted that China, as a catching-up economy, still has absolute cost advantages. Its wage levels are still significantly lower than in the West. If it succeeds in using or copying Western technology, this constellation will remain unchanged for several years to come. This is particularly true for industry. Therefore, almost all complaints about dumping from China are unjustified.

However, even a catching-up country could be expected to largely balance its current account – if one were prepared to do so oneself. Germany, as the ultimate mercantilist, is ruled out from the outset. Anyone who has enjoyed extremely high current account surpluses for over twenty years and has even been proud of them has forfeited any right to criticise other countries for rising surpluses. This also applies to the EU as a whole, which defends its (German) surpluses.

It should also be noted that, as the euro has appreciated against the US dollar, the Chinese currency has also depreciated against Europe. However, anyone who wants to change the currency situation would have to turn a much bigger wheel than anyone in Europe could currently manage. The EU Commission will therefore continue to annoy China in the coming years with tariffs based on unjustified accusations of dumping. It will achieve nothing with this. As always in history, the rich countries are fighting tooth and nail against a development that merely shows that wisely managed developing countries do have a chance of asserting themselves against the Western top dogs.